Companies seeking to raise new capital through the sale of their mining and oil blocks in Kenya will have to contend with new taxation measures that require up to 37.5 per cent of the mark-up to be remitted to the exchequer.
Guidelines for the just reintroduced capital gains tax (CGT) show that the net gain on disposal of interest in immovable property in the mining and petroleum industry will be taxed at 37.5 per cent for foreigners with permanent establishments and 30 per cent for residents.
The assessment, which is almost eight times that for net gains in property — land, buildings and investment shares at five per cent — is expected to kick off a fresh dispute between the government and prospectors even before the dust on the dispute on royalties settles.
Tax experts are already raising the red flag over the disparity in the enforcement of the capital gains tax, saying it would choke the growth of Kenya’s nascent petroleum and mining industry.
“I do not see why investors in oil and gas should be taxed differently from other people. I think that is a little unfair. Petroleum and mining is still a nascent industry, which we require to succeed. But if you keep taxing these people, there are a lot of other places in the world they can go to get mining licences,” said Nikhil Hira, head of tax practice at Deloitte & Touche, East Africa.
However, National Treasury Cabinet Secretary Henry Rotich last week said the tax rates in the mining and petroleum sector could only be reviewed in the next budget.
“That is how it is in the law but we are still discussing with the industry, both the mining and petroleum, to see if there are any changes that can be addressed in the next Finance Bill. What we agree will be put in the next Finance Bill (2015/2016),” Mr Rotich told The East African.
Immovable property refers to a mining right, an interest in a petroleum agreement, mining information or petroleum information.
The taxable gain, according to the Kenya Revenue Authority is the net gain arising from the disposal of an interest if the interest derives its value from immovable property in Kenya.
“We have to be careful because oil companies take a lot of risk in their exploration activities. While undertaking their drilling work, there is no guarantee they will get anything. Now what is happening is every additional shilling taxed reduces the funds available for them to carry out their exploration,” said Mr Hira.
According to Mr Hira, foreign companies that have registered branches in Kenya will dispose of their interests such as mining licences not necessarily to make a gain but to meet certain statutory requirements and /or to bring on board strategic partners to shore up their capital reserves.
“There is no gain they make in disposal of their interests. They are disposing of them to meet certain government requirements and to bring on board some partners to provide the necessary financial support required in exploration and drilling activities,” he said.
The tax on the net gains from the transfer of land, buildings and marketable securities came into effect on January 1, despite widespread concerns over its impact on stock and bond transactions and the blossoming property market in Kenya.
The government is looking to raise an estimated Ksh7 billion ($76 million) through the new tax measure before the end of the current (2014/2015) fiscal year.
Tax experts at the consultancy firm KPMG say reintroduction of the CGT will broaden Kenya’s tax base, increase revenue collection and align the country with its regional counterparts which all impose a similar tax.
Uganda levies CGT at 30 per cent while Tanzania charges 20 per cent for foreign-owned firms and 10 per cent for residents. In Kenya, the tax was suspended in 1985 to encourage investment in the stock market, real estate and mining sectors.
However, its reintroduction is being attributed to robust growth in the stock market, real estate sector, and extractive industries.
Data from Kenya’s Capital Markets Authority shows that equity turnover at the Nairobi Securities Exchange has soared 58 per cent over the past eight years, rising from Ksh94.9 billion ($1.05 billion) in 2006 to Ksh150.52 billion ($1.67 billion) in 2014.
In 2013, the NSE was ranked as the second best performing stock exchange in Africa, (after the Johannesburg Stock Exchange ) In the capital Nairobi, property values have increased and are attracting international investors while mineral and oil and gas deposits have been discovered over the past five years.
The CGT will be applicable on the gains that accrue to a company or an individual on or after January 1 on property situated in Kenya, whether or not the property was acquired before January 1. The rate for CGT on transfer of property is five per cent.
According to the guidelines the net gain is the excess of the transfer value over the adjusted cost of the property (sum of the cost of acquisition or construction of the property) that has been transferred. It is this excess that is subjected to tax at five per cent.
“The tax should be paid upon transfer of property but not later than the 20th day of the month following that in which the transfer was made, while a loss may be carried forward to be offset/deducted against a gain of a similar nature at a future date,” according to KRA.
Certain transactions are however exempted from the tax. These include sale of land by an individual where proceeds are less than Kshs 30,000,($333), transfer of assets between spouses as part of divorce settlement and disposal of property for purpose of administering the estate of a deceased person.
Other exemptions include income that is taxed elsewhere as in the case of property dealers, issuance by a company of its own shares and debentures, sale of agricultural land by individuals outside gazetted townships where the property is less than 100 acres and compensation by the government for property acquired for infrastructure development.
In addition, exchange of property necessitated by incorporation, recapitalisation, acquisition, amalgamation, separation, dissolution or similar restructuring involving one or more companies which are certified by the Cabinet secretary to have been done in the public interest will be exempted from the tax.
Proceeds from the transfer of individual residences occupied by the transferor for at least three years before the transfer will also be free from the tax. It is understood that land sellers outside Nairobi, Mombasa and Kisumu official boundaries are not subject to the tax for up to 99 acres as their land is considered rural agricultural land under the Eighth Schedule of the Income Tax Act.
This is despite rapid changes in recent years where the value of land on the outskirts has risen due to demand for housing as well as factories.